By Ashish Nangla KH08JUNMBA 63 Download is now available from my Blog: http://ashishnangla.com/2009/02/03/accounting-frauds-of-our-times/ Can Someone Update This With The Satyam Fraud ?

1. Accounting Frauds Of Our Times V0.1 ITM Executive MBA, Batch 13B, Term 1, Subject: Accounts Ashish Nangla [email_address] KH08JUNMBA 63

3. Balance Sheet: Sneak Peek Sample Balance Sheet as on 31 st March 2008 Assets Liabilities and Owners' Equity Cash $ 6,600 Liabilities Accounts Receivable 6,200 Notes Payable $30,000 Accounts Payable Total liabilities $30,000 Tools and equipment 25,000 Owners' equity Capital Stock $ 7,000 Retained Earnings 800 Total owners' equity $7,800 Total $37,800 Total $37,800

5. Income Statement: Sneak Peek - INCOME STATEMENT BOND LLC - For the year ended MARCH 31 2007 $ $ Revenues GROSS PROFIT (including rental income) 496,397 -------- Expenses: ADVERTISING 6,300 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 RENT 13,000 UTILITIES 491 PRINTING, POSTAGE & STATIONERY 320 ENTERTAINMENT 5,550 LICENSES 632 BANK & CREDIT CARD FEES 144 BOOKKEEPING 3,350 EMPLOYEES 88,000 RENTAL MORTGAGES AND FEES 74,400 -------- TOTAL EXPENSES (194,512) -------- NET INCOME 301,885 ========

6. Typical Tricks for Creative Accounting Accounts Receivable The accounts receivable number that shows up in the asset section of a balancer sheet is almost always an estimate of what accounts are actually collectable. Why is the number an estimate? Because even if management can identify the precise amount its customers or clients owe the business, usually it is less than certain that this is the actual number that will ultimately be collected. Accounts Payable Management may have a motive to understate payables, as this understates expenses and overstates net income. Usually the amount of payable understatement is not too great and such understatement can easily be detected. Deferred Revenue A manager can overstate income and understate liabilities by treating deferred revenue as earned revenue. Essentially, this shady practice seeks to recognize revenue before it is actually earned. Such mischief often is not easy to detect, because it is not always clear when the earnings process is fully complete.

7. Typical Tricks for Creative Accounting Prepaid Expenses A manager also can understate current year expenses by claiming they are prepaid expenses. This amounts to a fraudulent claim that payments for a certain service benefit future accounting periods when, in fact they do not. Fixed Assets Because accounting practices allows so many different methods of depreciation and the useful life of assets is subject to varying estimates, there is plenty of opportunity for management mischief. Management can make a firm appear more profitable than it really is by understating depreciation expense. Inventory Inventory offers a big opportunity for management to air brush their financial statements. If they want gross profits and, hence, operating profits to appear higher, the value of ending inventory simply needs to be overstated. There are many ways this can be done. The ending inventory value can be fudged upward by overstating the amount of inventory on hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged inventory can be included in the ending inventory count.

11. Worldcom

12. The company showed a $1.4 billion profit in 2001, rather it was actually in a loss In June 2002, It was uncovered that approximately $3.8 billion of fraud during an examination of capital expenditures. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in history. ($103bn) By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion. Worldcom

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